“I think my spouse is hiding assets.” | Divorce and Hidden Money

hidden_assets_divorceOne of the most common fears of divorcing women is that their husbands have hidden assets and that they will be cheated in the divorce settlement unless they uncover the hidden loot. It is a common concern of would-be amateur advisors such as friends or relatives who k now nothing about divorce other than what they have seen on television. And when clients divulge these fears to their lawyers it invariably begins a very expensive process of discovery in which forensic accountants are hired to ferret out the missing money with exhaustive searches of the husband’s records.

What if he isn’t?

I do not maintain that people do not hide assets. But I have a major problem with the perceived frequency of the phenomenon and the frequency of huge fees to lawyers and accountants in search of what is not there. As it is never possible to prove a negative- “I don’t have any hidden assets.”-all a lawyer can do is conduct a thorough search that finds nothing and then be able to say that “I tried my best.” I recall one case in  which based on a wife’s insistence that her husband had hidden money, an accountant ran up $40,000 in fees and discovered that the husband actually had $100,000 LESS than he had reported. The argument of the wife was that because the husband had cheated with another woman, nothing he said could be trusted and therefore he must be hiding money.

Money is difficult to hide

In truth, the conditions necessary for a person to successfully hide money are difficult to create. People who are employed receive all their income through check so there is a complete “paper trail” of where their money came from and where it has gone. In such cases it is unlikely that he/she can hide significant amounts of money without being found out. And in order to hide it from the wife he would also have to hide it from the IRS. For most people a possible trip to Leavenworth Prison would not be worth it to secret away essentially small amounts of money. So when there are paper or electronic records of all the income it is unlikely that it is worth large expenditures on accountants.


Does Your Spouse Own a Business?

The situations in which it is possible to hide money are limited. One is ownership of a business in which there are many cash transactions such as a restaurant or other retail business. It is possible in these businesses to divert cash and not deposit it in the bank. But there are a number of mitigating circumstances. The first, in my experience, is that when there are substantial amounts of cash diverted, both spouses are acutely aware of it because there has been a long pattern of spending the cash and both spouses have done so.

… And Have A History of Diverting Cash?

Remember, to divert cash from the business one must engage in tax evasion so most people who do so are savvy enough to spend the cash in places where the cash is not particularly notable. Moreover, most couples who do this together also file joint income tax returns thus engaging in tax evasion. These couples do not want to fight about the cash in court because many judges report such revelations to the IRS. Another limiting factor is that most couples who divert cash must be careful that their reported income not be dwarfed by their lifestyle. I recall a couple both of whom were hairdressers who owned a chain of hair salons who lived an ostentatious lifestyle complete with mansion, expensive cars and vacations, private schools and servants. But they reported $30,000 a year in taxable income. They got away with it for many years until one day when they received a visit from the IRS. The results were catastrophic.

Generally, family owned businesses, even though not cash businesses, offer the most frequent opportunities for hiding money. But even here the chances of being discovered are great enough to discourage many would be felons. When these couples get divorced accountants commonly review the business records not to find hidden assets but to establish the value of the business for purposes of dividing the marital property. More common than hidden money are instances in which personal expenses for the family are written off as business expenses thus reducing the income regarded as taxable. This can occasion controversy over what the husband’s ( or wife’s) true income is for purposes of determining child support and alimony. But even here, both sides generally acknowledge the extent of the practice, and can usually negotiate a resolution.

What About Offshore Tax Havens?

The other situation in which money can be hidden involves wealthy investors who engage in various schemes to put money offshore in foreign tax havens. There is no question that this happens, but in such wealthy divorces the role of accountants is well established and the other spouse more often than not, is well aware of the offshore money. It is unlikely that such wealthy people will risk jail just to get a little more of the marital wealth.

It Can Happen, but Not as Often as You Might Think

The inference of hidden assets is significantly greater than the real incidence of hidden assets. It would be naive to believe that it never happens; of course it does. But one should beware of spending tens and hundreds of thousands of dollars in legal and accounting fees unless one is fairly certain that there really is a lot of hidden money and that the cost of finding it is worth it.

I have seen lawyers spend fifty thousand dollars of their client’s money finding ten thousand dollars salted away.  Vague suspicions unsupported by real evidence should not be the basis of such expensive wild goose chases.

As always, if you would like to talk about your case specifically, I welcome and encourage you to contact me.

Sam Margulies, North Carolina Divorce Consultation & Mediation

Sam Margulies, Ph.D., J.D., is one of the most experienced mediators in the United States. Since 1980, he has mediated hundreds of civil disputes and approximately four thousand divorces including many complex multi-million dollar matters.

Author of several books on divorce, Sam Margulies is an empathetic and knowledgeable guide through the difficult journey of divorce.  Residing in North Carolina but helping clients all over the world, contact Sam with your questions and to talk about your divorce.

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